International Paper Beats on Earnings in Q1 - Analyst Blog

International Paper Company IP reported operating earnings (excluding one-time items) of $265 million or 61 cents per share for the first quarter of 2014 compared with $292 million or 65 cents in the year-ago quarter. The quarterly operating earnings beat the Zacks Consensus Estimate of 57 cents.

Net loss for the reported quarter was $95 million or 21 cents per share compared with a net income of $318 million or 71 cents per share in the year-earlier quarter. The decline in earnings was due to a pre tax charge of 495 million associated with the Courtland mill shut down.
       
Net sales for the reported quarter were $7,014 million versus $7,090 million in the year-ago quarter. However, the quarterly sales missed the Zacks Consensus Estimate of $7,020 million. The year-over-year decrease in sales was due to unfavorable weather conditions and lower revenues from Printing Papers and Distribution, partially offset by Industrial Packaging.

Segment Performance

Industrial Packaging: Sales from this segment increased 3.7% year over year to $3,693 million in the reported quarter. Operating income stood at $453 million in the reported quarter versus $355 million in the year-ago quarter. The increase in year-over-year operating income was driven by higher selling prices for boxes.

Printing Papers: Sales were down 8.7% year over year to $1,406 million in the reported quarter, while operating loss was $410 million versus operating income of $149 million in the year-ago quarter. The dip in operating income was primarily due to costs and lower volume associated with the Courtland mill closure and the impact of severe weather conditions.

Consumer Packaging: Sales from this segment decreased 0.1% year over year to $829 million. Operating profit was $17 million versus $7 million in the year-ago quarter. The increase in operating profit was driven by improved pricing.

xpedx (Distribution Business): Sales for the segment declined 5.9% year over year to $1,302 million. The segment reported an operating profit of $5 million versus an operating loss of $5 million in the year-ago quarter. The increase in earnings was driven by slightly improved margins, lower spending and lower overhead costs partially offset by weaker sales in the reported quarter.

Balance Sheet

Cash and temporary investments aggregated $1,341 million at quarter end. Cash flow from operating activities stood at $471 million as of Mar 31 2014, while long-term debt was $8.8 billion.

International Paper recorded Ilim Joint Venture equity losses of $31 million in the reported quarter versus equity loss of $12 million in fourth quarter 2013.

Other

Earlier in Jan 2014, International Paper announced that its distribution business xpedx will merge with a distribution solution company, Unisource Worldwide, Inc., to form a new publicly traded company. The merger is expected to close in the middle of 2014.

The transaction will happen in a Reverse Morris Trust structure, which is used when a parent company has a subsidiary that it wants to sell in a tax-efficient manner. International Paper will receive $400 million in cash and contribute the assets of xpedx to a newly formed wholly-owned subsidiary called xpedx Holding Company.

The subsidiary will be spun off into a new company. Following the spin off, UWW Holdings, the parent company of Unisource Worldwide, will merge with xpedx Holding Company. International Paper will own 51% of the new company while the remaining stake will go to UWW Holdings.

The newly formed publicly traded company is expected to create an enhanced platform for profitable growth across packaging, print and facility solutions. Post merger, the new company is expected to have annual revenue in the range of $9 billion to $10 billion and generate approximately $200 million in synergies. The new company is likely to enhance top-line growth opportunities and provide customers with innovative solutions in product packaging, paper and print management, supply chain and logistics services and facility solutions.

Outlook

Despite a challenging environment, the company remains focused on its initiatives that will help to expand its margins and generate strong free cash flow in 2014. International Paper remains bullish about its performance in 2014.

International Paper currently has a Zacks Rank #4 (Sell). Other stocks that look promising and are worth a look now include KapStone Paper and Packaging Corp. KS, Graphic Packaging Holding Co.  GPK and Berry Plastics Group, Inc. BERY, each carrying a Zacks Rank #2 (Buy).